ACCA Financial Management (F9) Certification Practice Exam

What feature distinguishes zero coupon loan notes from other loan notes?

1. Interest is paid semi-annually.

2. They are redeemable at a premium.

3. No interest is paid during the life of the note.

4. They have a shorter maturity period.

The correct answer is: No interest is paid during the life of the note.

Zero coupon loan notes are characterized by their unique feature of not paying any interest during the life of the note. Instead, these notes are issued at a discount to their face value, and investors receive a single payment at maturity that includes the face value of the note. This means that the return for the investor is the difference between the purchase price and the amount received at maturity. The absence of periodic interest payments is the most significant differentiator of zero coupon loan notes compared to other types of loan notes, which typically involve regular interest payments throughout their duration. This structure can be particularly appealing for investors looking for a specific future cash flow, such as saving for a long-term goal. The other features listed do not apply to zero coupon loan notes, making this attribute the defining characteristic that sets them apart from traditional loan notes.